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November 22, 2022updated 23 Nov 2022 9:14am

Increased cost and scrutiny push polluters to private market

Environmental costs have risen 27% since 2020. No wonder firms like Golden Energy and Resources are keen on the private market.

By Adrian Murdoch

private market, capital, ESG
Getting out of the limelight. Some carbon-intensive companies struggling for capital are tempted to go private and escape public scrutiny. (Photo by Sanay Lanang, via Shutterstock)
  • The environmental risk to listed businesses is up 27% since 2020 and now stands at $4.3trn globally.
  • A new report from Moody’s shows that five sectors have moved into the “very high risk” category.
  • To escape a rise in the cost of capital, Singapore’s Golden Energy and Resources is taking its coal business private.

The cost of environmental risk to business is growing and now stands at $4.3trn globally for listed companies, tempting many to look at the private market for a solution.

There has been a 27% bump in debt which is exposed to high or very high environmental credit risk since December 2020 and it is up 109% since the Paris Agreement was announced in November 2015.

This comes from a new report from ratings agency Moody’s published at the very end of October that looks at the heightened credit risk to companies caused by environmental considerations. It examined 89 global sectors with total rated debt of $83trn.

Five sectors have become “very high risk”, up from the “high risk” category in 2020.

These are integrated oil and gas companies, independent exploration and production, refining and marketing, chemicals, and mining other than coal. Between them, these sectors account for $1.9trn in debt.

Two years ago, only coal mining and coal terminals were rated “very high” credit risk from environmental considerations.  

“What you’ve seen right now is essentially an amalgamation of all the moves, which we hadn’t two years ago,” says Moody’s senior analyst and lead author of the report Ram Sri. “There was one sector which moved from high to moderate.”

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The reason that auto suppliers have improved, Sri admits, is a slight recalibration, but the sector is less exposed to carbon transition risk than its automaker customers.

Customer diversity helps mitigate risk exposure to any one automaker and the fact that many auto parts are used in both traditional combustion engines and alternative fuel vehicles also helps.

Scope for optimism

If the report makes for pretty bleak reading, it is unlikely to get better any time soon.

Sri confirms that in two years’ time, he expects more sectors to join the high-risk club. “We’ll probably see an upward trend,” he says.

Sri reckons that it might “not be as big a jump” as seen this time, but skill as a fortune teller is not needed to see unregulated utilities and power companies, car manufacturers and building materials companies making the list next time.

But there are reasons to be positive. Sri believes that society is now set on the path of change. “We have said that we don’t want pollution and carbon dioxide in the air,” he says.

What he has seen is governments taking notice and starting to change the process. “We then get regulations which flow down to the individual sectors and cause businesses to change their business profiles,” he continues.

Within the next couple of years, he reckons that as society focuses more on carbon policies and carbon regulation, there could be “a little more tightening” of credit risk.

He points out that part of the problem is that some sectors can’t move especially quickly.

Sri cites the example of utilities which are faced with the fact that even were they to convert all of their assets to renewables, they are faced with a grid system that can struggle to take renewable energy.

“It’s about investment not just in technology, but also the assets and other factors which could play into making the changes for the future,” he says.

This is why it takes a long time. The government has what he calls "a long runway" before it enacts laws and the market still needs to get used to what it has to do.

Out of the limelight

The rising cost of capital is real. But in practice, this means that some corporations have moved away from burying their heads in the sand about sustainability to pushing all risk into the private sector.

Last week Capital Monitor looked at how Singapore-based energy and urban development company Sembcorp Industries (Sembcorp) was dodging a 25 basis point (bp) step up on its S$2.3bn ($1.6bn) sustainability-linked bonds and loans by selling off its the company’s coal power business in India even while maintaining operational control.

Signs of the increasing pressures on companies involved with coal can be seen with Singapore’s Golden Energy and Resources (Gear).

Despite a one-year share return of 161.7%, on 9 November the company announced that it was delisting and splitting itself into two companies one to look after the coal business, the other to focus on gold mining, forestry and renewable energy. The ability to raise capital was given as the reason.

“Such segregation will allow the group to reposition itself away from the energy coal industry which is currently facing environmental, social and governance (ESG) pressures, allowing the group to expand on its financing options which would otherwise have been relatively limited if it were to be continuously exposed to the energy coal business,” it said.

But it appears nothing of the sort. Gear is currently majority owned by Indonesia’s multinational Dian Swastatika Sentosa and is being taken private at S$0.16 per share – a 76.1% discount to where its shares were trading before the announcement was made. More to the point, the mining business is being bought by an Indonesian company called Duchess Avenue whose main shareholder is the wife of Dian Swastatika Sentosa’s controlling shareholder.

Yet again, this is more about the optics of ownership rather than actual change. But as costs rise, companies will have to take note.

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